There is something magical about making money from the stock market which is difficult to describe.
Where else can you invest a sum of money and find yourself becoming richer even though you have not lifted a finger to earn it, as the price of the stock you bought goes up?
Of course, you may encounter lemons among your investments. Companies may fail and such calamities may cause you to lose money. But if you take the trouble to analyse the company you are buying into, the likelihood is that you will come out as a winner in your investments.
The sad thing is that many investors only learn this lesson the hard way after losing a lot of money in the stock market.
Indeed, for me, my first lesson came as soon as I started working in 1986.
Just months before that, five stock-broking firms had folded and the stock market had to close for an unprecedented three days in order to clean up the mess caused by a massive fraud involving a then-major listed firm known as Pan-Electric which was on the buy list of most remisiers.
Lesson #1: Never buy a stock because someone spins you a good story. You will find that most of these stories are fairy tales. Always do your homework and understand the stock which you are buying into.
Lesson #2 came in October the following year when disaster again struck the stock market as the Straits Times Index (STI) nose-dived 25 per cent in a single day, following a 23 per cent overnight plunge on Wall Street known in history as the Black Monday crash.
It provided a foretaste of how a squall on Wall Street could transform into a mighty global tempest, as financial systems across the world become more and more intimately connected due to globalisation.
Larger markets such as New York and Shanghai will always have a bearing on local stock prices. As such, even when you have done your homework on a stock, you should consider the overall global investing environment before you make your investment decision.
Then there was the 1997/1998 Asian financial crisis when Malaysia shook the Singapore stock market to the core when it imposed capital controls on the ringgit and declared Singapore’s then-thriving market trading Kuala Lumpur-listed shares to be illegal.
It rammed Lesson #3 forcefully into me: Never take for granted any additional risks which you may encounter when you make an investment outside Singapore.
Yet, investing in the stock market can be a very profitable activity if an investor displays perseverance and ignores the occasional turbulence that rocks the market.
In 1985, the STI fell to as low as 700 points following the Pan-Electric debacle. An investor who picked up blue-chips at that point would have trebled his gains over the next three decades, as the STI is now trading at 2,800.
Over the years, the make-up of the stock market has also changed significantly.
Local companies had made up the bulk of the listings here 30 years ago. But almost half of the firms listed on the Singapore Exchange are now based overseas. This has made investors as familiar with foreign firms like Jardine Matheson, Hong Kong Land and Indonesia-based Golden Agri-Resources as they are with local household names such as DBS Group Holdings, Singapore Airlines and Keppel Corp.
For me, there is never an unexciting day in the market. Over the years, I have woken up each morning looking forward to seeing how the market will perform during the day. There is nothing like a sky-rocketing stock price or a sudden plunge to get the heart pumping.
Over the years, I have come to this conclusion: To be a successful investor of the stock market, one doesn’t need complicated investment strategies involving complex computer programmes.
Instead, a lay investor can succeed in his investments using a simple approach.
These strategies, outlined in my 2014 book Small Change: Investment Made Simple (Straits Times Press/98 pages/$15), include:
1. The dollar-cost averaging approach
Most investors find that the more they trade, the less likely they are to make money. Worse, they may even pile up huge transaction fees from over-trading.
To overcome this handicap, one suggestion is to adopt a “dollar-cost averaging” approach towards your investments.
This involves setting aside exactly the same sum of money every month to buy into a fund which tracks a widely-watched market gauge such as the Straits Times Index. These are called exchange-traded funds (ETF) and include the SPDR STI ETF and Nikko AM STI ETF.
When the market goes up, you will get fewer shares. But when the market is down, you get a little more.
Best of all, even if you are a salaried worker working long hours in the office and do not have the time to monitor your investments, you can open an account with a bank or brokerage to invest a fixed sum in the STI ETF every month.
This gives you a hassle-free way to invest There is no guarantee that an investor will make any money putting his savings in the STI ETF over a short period of time, but if he is willing to hold it for a long period - say, five to 10 years - he is likely to emerge a winner.
The United States market, for example, offers some insight as to what a dollar cost averaging investor can achieve if he perseveres in his effort in investing in an ETF.
If this investor had entered the US stock market in the three years after the 1929 Wall Street crash, he would still have lost about two-thirds of his money. But he would have broken even the following year in 1933, and doubled his money in 1936.
What is more extraordinary is the reward he gets if he diligently put aside US$100 every month, starting from the Great Wall Street crash in 1929, and continued to do so for 30 years. While his outlay was only US$36,000, the size of his investment would have grown to US$411,000, or more than 10 times as much.
Currently, there are four financial institutions offering a monthly investment plan on the STI ETF. They are POSB, OCBC, Phillip Securities and Maybank Kim Eng Securities. All of them allow an investor to start an investment saving plan with as little as $100 a month.
2. Go with the fund flows
One lesson from the 2008 global financial crisis for me was that stocks everywhere seem to move in lockstep most of the time.
This runs counter to the premise held by some stock analysts that an investor can hunt for undervalued stocks and buy into them in the hope that their attractiveness will eventually be recognised by others.
Tracking fund flow data - which measures the amount of money entering and leaving different markets - often offers valuable insights as to whether a market is overheating or unloved. In fact, merely following the money in and out of a market can be a very profitable endeavour.
Fund flow data also offers investors an indication as to when to re-enter the market when stock prices go on the roller-coaster.
To give an example, take the period at end-February 2009, when the global banking system teetered on the edge of collapse as US banking giant Citigroup broke US$1 in share price while HSBC Holdings tumbled 24 per cent in one day.
Those who followed fund flow data would have noticed that investors had already started streaming back into Asia, pouring US$583 million into China stocks alone in the space of one week.
It turned out to be a master stroke for those who were re-entering the market even though situation seemed bleak, with financial markets experiencing a V-shaped recovery as they responded to the measures made by then newly-inaugurated US President Barrack Obama to calm the global banking panic.
While fund flow data was once available to only well-heeled investors served by private bankers, retail investors can now tap on research reports issued by big investment banks such as CitiBank and Morgan Stanley for such information from their brokers.
3. Buy-and-hold and make good money
It is a myth that you need large sums of money to invest successfully. In fact, most of us started our investments in a small way.
In my case, I was introduced to the world of investing early in my working life when I paid $3,000 in 1986 to buy 1,000 Singapore Bus Services (SBS) shares. This was to enable me to qualify for the concessionary monthly bus travel pass which the company offered.
Even though I started driving to work some years later, I kept the shares for sentimental reasons. It turned out to be the right decision. The original SBS shares have multiplied into 16,040 ComfortDelgro shares and 1,200 SBS Transit shares which are now together worth about $50,000.
I am sure that my experience is not unique and that there are many investors who have enjoyed similar windfalls in holding on to their stock investments over the years.
As investors, we tend to spend too much of our time monitoring our investments, and this distracts us into selling the winners early. What we should do is to put our money into assets that we are comfortable with, and carry on enjoying what we are doing.